Rationale for Tobacco Excise

Tobacco consumption and smoking prevalence both respond to tobacco price changes. The price mechanism is generally accepted to be the most effective population-level policy lever available to government to combat smoking. Price responsiveness is generally greater among young people, and low income groups.[8]

There are three broad reasons for taxing tobacco: raising revenue, addressing negative financial "externalities" from smoking, and discouraging tobacco use for social policy reasons[9].

Revenue

Tobacco taxes are very efficient at raising revenue, as compared to other goods and services, consumers are not highly price sensitive due in part to the strongly addictive nature of nicotine.

However, New Zealand generally employs a broad-base low rate approach to tax - this is a fairer and generally more efficient way to raise revenue than specific commodity taxes. The taxation of tobacco is an exception to this approach, as it applies a higher rate of tax to a narrow base. Narrow-based taxes should be designed primarily to correct particular market failures or other policy goals, not for general revenue-raising.

Correcting negative Financial Externalities

Tobacco consumption imposes significant costs on government (mainly the cost of publicly funded health care for tobacco-related illness), on smokers' families (including harm to children), and the wider community (including harm from passive smoking). Excise can make smokers "internalise" these costs in the price they pay for tobacco. This argument is called "negative externalities.

On the narrow fiscal grounds of covering the costs smokers impose on government, further increases in tobacco excise may not be justified. At over $1.3 billion per year, tobacco excise revenues may already exceed the direct health system costs of smoking[10]. When the broader fiscal impacts of smoking are considered (eg shorter life expectancy reducing smokers' superannuation and aged care costs), smokers are probably already "paying their way" in narrowly fiscal terms.

Smoking may also reduce labour productivity and impose costs on employers, but in the time available we have not been able to study the research evidence to assess whether such productivity losses are material, and whether they are effectively "internalised" through effective wage rates in the functioning of the labour market.

Social Policy Objectives

The social policy arguments for reducing and progressively working to eliminate smoking in New Zealand have been canvassed extensively and summarised in the report of the Maori Affairs Select Committee, and the Government's response in 2011. Social policy arguments for tobacco excise rest on judgements about the extent to which the government should seek to discourage an addictive, destructive and harmful habit (especially amongst young people and relatively disadvantaged communities) to improve the health and wellbeing of all New Zealanders and to address inequalities in health and economic outcomes. It is on the basis of this Government has adopted the goal of a Smoke-Free New Zealand by 2025.

Ultimately, interventions to reduce smoking increase life expectancy and quality, which are difficult to satisfactorily quantify in economic terms, but are considerable contributions to national welfare.

Excise increases should be considered as part of a broader package of measures to ensure our tobacco control strategy is coherent, with mutually-reinforcing elements. Excise increases are most effective at deterring uptake by new smokers. As the "stock" of current smokers will still be the majority of smokers in 2025, even aggressive increases in tobacco excise tax rates are unlikely to be sufficient on their own to achieve the smokefree goal in this timeframe.

Notes

[8]Consultation on the Future of Tobacco Control, United Kingdom Department of Health, May 2008

[10]A recent Ministry of Health study estimated health costs of smoking at up to $1.9 billion per year (15% of the Vote Health). While this estimate used more detailed data analysis than previously available to estimate health costs, it is well above previous estimates (a 2007 estimate put the cost of smoking to the health system at $300-$350 million per year) and its methodology for comparing lifetime health care costs has been contested.